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ACCT 2102, week 8 notes

by: Randi

ACCT 2102, week 8 notes ACCT 2102

Marketplace > University of Georgia > Accounting > ACCT 2102 > ACCT 2102 week 8 notes
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About this Document

The cover lecture material over chapter 7
Principles of Accounting II
Class Notes
CVP, indifferencepoint, FC, sensitivityanalysis, decisionmaking, salesprice, variablecost
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This 5 page Class Notes was uploaded by Randi on Sunday October 9, 2016. The Class Notes belongs to ACCT 2102 at University of Georgia taught by Farmer in Spring 2016. Since its upload, it has received 6 views. For similar materials see Principles of Accounting II in Accounting at University of Georgia.


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Date Created: 10/09/16
Week  8  Notes   ACCT 2102 PROF.  FARMER     Chapter  7:  Cost-­‐Volume-­‐Profit  Analysis     Cost-­‐Volume-­‐Profit  (CVP)     • Ways  to  Increase  Profit:   1. Increase  Revenue   Revenue  =  Sales  Price  X  Number  of  Units     § The  company  can  either  increase  sales  price,  or  decrease  VC     2. Decrease  cost   Cost  =  y  =  mx  +  b     § The  company  can  decrease  FC       • Traditional  Income  Statement   o Arranged  by  cost  function  (not  behavior)     Sales  Revenue   (COGS)     Gross  Profit   (SG&A)     OPY     • Period  costs  are  mixed       Week  8  Notes   Contribution  Margin     • Where  can  a  CM  income  statement  be  used?     o Can  be  used  in  planning,  decision  making,  and  controlling     • Why  do  managers  like  them?   o Readily  gives  information  about  cost  behavior     • What  is  the  definition  of  the  Contribution  Margin  (CM)?   o CM  is  the  excess  of  Sales  Revenue  over  Variable  Cost     • What  does  CM  tell  us?   o It  tells  us  the  amount  available  to  cover  FC  and  generate  OPY       • What  does  a  CM  income  statement  look  like?   o CM  income  statement  is  arranged  by  cost  behavior     SR   (VC)     CM   (FC)     OPY     • How  is  the  unit  CM  calculated?     SP   Unit  VC  includes   (Unit  VC)       variable  product  and   Unit  CM   variable  period  costs     • Why  is  this  different  from  the  unit  GP?   SP   (Unit  product  costs)   Unit  Product  costs  includes   Unit  GP   variable  product  and  unit   fixed  cost     • What  does  CM%  tell  us?   o CM%  is  the  percentage  (amount)  of  the  sales  dollar  that  is   contribution  margin   o Unit  CM  is  the  amount  from  each  unit  sold  that  is  CM     • How  is  the  CM%  calculated?     CM%  =  CM  /  SR   Or     CM%  =  Unit  CM  /  SP       Week  8  Notes   • Breakeven  point   OPY  =  0   o Sometimes  used  to  look  at  viability  of  a  product     • Target  Profit   OPY  >  0     • Formula  used  to  solve  for  the  number  of  units  needed  to  either  breakeven   or  generate  a  certain  target  profit:   OPY  +  FC   =  #units              Unit  CM               • Formula  used  to  solve  for  the  sales  revenue  needed  to  either  breakeven  or   generate  a  certain  target  profit:   OPY  +  FC     =  SR                CM  %           CVP  can  be  used  for     1. Decision  making   2. Sensitivity  analysis   3. Indifference  Point  Calculations     • Sensitivity  Analysis     GENERAL  RULES:   o If  sales  price  increases,  breakeven  point  decreases   o If  sales  price  decreases,  then  break  even  point  increases   o If  variable  costs  increases,  then  breakeven  point  increases   o If  variable  costs  decrease,  then  break  even  point  decreases   o If  fixed  costs  increases,  then  break  even  point  increases   o If  fixed  costs  decrease,  then  break  even  decreases     • Higher  FC  =  higher  operating  leverage   o At  the  beginning  of  your  operations,  this  makes  things  more  risky     • Low  FC  =  low  operating  leverage   o You  don’t  stand  to  loose  a  lot,  but  you  won’t  gain  much  either   Week  8  Notes   • If  a  company  operates  at  a  higher  FC  than  its  indifference  point,  the  higher   operating  leverage  is  more  appropriate  for  the  company       Week  8  Notes     • Indifference  point   o Point  where  2  options  will  yield  us  the  same  OPY     • Indifference  point  calculation   OPY  =  OPY   Or     OPY  =  SR  –  VC  –  FC    


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